For the no part of my answer- The mere fact that you are asking this question in this forum tells me that you're looking for a solution to mitigate the risk.

Could this be mitigated by the investors creating a corporation, depending on their tax bracket?

That can be good for diversification and risk mitigation, but bad for returns.  

We also have 3 young kids to think about, so we're all about mitigating risk as much as possible. 

While the smoke damage can be a simple fix, it can also require pulling insulation, doing mitigation, and replacing drywall (and unfortunately it's tough to tell until the remediation starts) even in rooms that were not impacted by the fire. 

We use to have an in house protection plan, however to mitigate risk from the tenant aspect in the event something were to occur such as i.e. fire, we wouldn't be left holding the bag.As for the facility itself, I would have to research that as it is above my pay grade. 

The veil of an LLC can be pieced pretty easily and so like @Bryan Danger mentioned it's more important to have very good umbrella coverage.Curious why you'd go through the trouble of moving in only for a few months and then rent it out?

It will be higher of course but you could mitigate by buying a two family and let the tenants pay for it.

I want to address this mostly for perception of privacy/safety reasons, as well as noise mitigation. 

IMO, the management company could have mitigated much of this damage if had they acted as I stated they should, that this is an emergency situation and warrants an emergency call to the plumber.